Description

Nearly all securities trading occurs among brokers or dealers. For about 1000 years, merchant firms of varying size and specialization have traded securities among themselves. For most of this time, trades were effected directly and during the two centuries from roughly 1800 to 2000 through quasi-public organizations called “exchanges”. Around 2000, the largest broker-dealers began to re-internalize trading into their own proprietary matching platforms.

Although securities exchanges were first established to create monopoly conditions, they also brought efficiency: private ordering among members reduced risks from both counterparties and issuers through vetting and disclosure. Within the exchange, regular operations and transparent protocols democratized the market among broker-dealers, small and large. From the 1930s, these private institutions were brought within formal securities law, so that securities trading was made quite level, with all broker-dealers engaging each other within a transparent arena on which oversight focused. At the turn of the 21st century, however, technology and regulatory reform allowed the largest broker-dealers to escape the transparent egalitarianism that exchanges had become and create their own proprietary trade matching venues.

The story of securities trading has been an evolution from firm to market and back to firm (Coase 1937) in conjunction with varying combinations of formal and informal institutions (North 1990). This evolution has been shaped by law and technology, but driven in its entirety by broker-dealer self-interest. As we approach the end of the era of concentrated trading in highly regulated securities exchanges, this article gives evidence of what we are losing and why. The dismantling of securities exchanges, often understood as embracing innovative technology to stimulate competition and lower prices, is the result of a rational desire of the largest broker-dealers to escape the transparency and democratizing function of regulated securities exchanges so as to return trading to a model in which leading broker-dealers control the nature and direction of the market.

About The Speaker

David Donald has been a Professor in the Faculty of Law at The Chinese University of Hong Kong since 2008. In 2010, he founded the CUHK Centre for Financial Regulation and Economic Development and served as its executive director until 2013. In 2014 he founded the CUHK New Ventures Legal Team (NVLT), a clinical support group for the University’s Pre-Incubation Centre for startup companies. In 2017 NVLT was turned into the New Ventures Legal Clinic in conjunction with the CUHK Entrepreneurship Initiative. He has served in many administrative capacities, including as a member of the University Senate Committee on Student Discipline and director of the Faculty of Law’s PhD and MPhil Programmes.

From 2003 until 2008, David taught at the Institute for Law and Finance of the Goethe University in Frankfurt, Germany. For the decade preceding that he worked as a commercial, corporate and securities lawyer in Washington, Milan, Rome and Frankfurt, serving the investment, acquisition and financing activities of multinational enterprises and as a member of the legal team that created the first international funds transfer system for the Euro.

David was a principal investigator of a five-year project (2012-2017) funded by the Hong Kong Research Grants Council (RGC) Theme-based Research Scheme on “Enhancing Hong Kong’s Future as a Leading International Financial Centre” and was the principal investigator of a three-year public policy project (2009-2012) also funded by the RGC, “Anatomy of a Financial Centre: A systemic analysis of Hong Kong’s legal and regulatory framework for its securities market.” David has written extensively on market structure, securities clearing and settlement, and corporate law. His books include A Financial Centre for Two Empires: Hong Kong’s Corporate, Securities and Tax Laws in its Transition from Britain to China, The Hong Kong Stock and Futures Exchanges – Law and Microstructure and (with Andreas Cahn) Comparative Company Law (2nd ed. 2018).

David holds a PhD in Law (summa cum laude) and an LLM (magna cum laude) from the Goethe University, a Juris Doctor (cum laude) from Georgetown University and a PhD in Comparative Literature (high distinction) from SUNY Buffalo.